Question
Consider a 30-year maturity bond with an 8% coupon with a $1,000 face value. Suppose the yield curve is a flat 8% for all maturities.
Consider a 30-year maturity bond with an 8% coupon with a $1,000 face value. Suppose the yield curve is a flat 8% for all maturities.
1. What is the present value of this bond?
2. What is the duration of this bond? What is the modified duration? You may want to use Excel. 3. Using our simple formula, how would the price of the bond change is the yield curve increases from a flat 8% to a flat 10%? 4. What is the convexity of this bond? (Assume the interest rate is 8%). You may want to use Excel. 5. If the interest rate changes from 8% to 10%, what is the price change of the bond, using the more formula which has convexity? 6. What is the exact price change?
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